By Doug Wadsworth
NCUA regulations ensure our CUs operate in a safe and sound manner, to serve the public and protect the insurance fund. Those regulations are vital to provide clear and standardized operation guardrails. There are other regulations (outside individual safety and soundness) that serve to keep the cooperative structure healthy and protect our industry reputation, like ensuring clear proper notifications for mergers, or disclosing the deposit insurance and non-discriminatory lending standards. We gotta have those, for our entire movement’s sake, and sometimes we need more, as times change.
The Beast of Bureaucracy
With the repeated iteration of business operations over time, more potential risks are exposed. Well-meaning regulatory agencies diligently increase that body of regulation to address newly revealed risks. This is good to a point. The nature of bureaucracy (left unchecked) leads to a regulatory burden that approaches infinity, as it seeks to address an infinity of potential risks.
But who is conducting a “cost-benefit analysis” of new regulations addressing those risks?
I heard about a credit union that lost money on a car loan because somebody had secretly switched out the engine, which wasn’t reflected on the title (as a rebuilt). Based on that single, rare occurrence, the credit union instituted a policy to search and locate the serial number on the engine of every car they financed, to ensure it matched the VIN #. They mounted a mirror on a wheeled stick, which an employee would push under every car they financed in the future, to verify they matched.
How much time and trouble does that new “regulation” take, added up over days and years and hundreds of cars? What is the statistical chance of that ever occurring again, and how much $$ did they lose, anyway? If the chance of something happening is low, and the cost would also be low – don’t spend time on or money on it!
The Wrong Incentives
Bureaucratic agencies are not really incentivized to consider common sense cost-benefit analysis–their job is risk reduction (and the incentive to write new regulations is a type of job security).
A wise long-distance runner may prudently carry an extra water bottle, snack and pair of socks, to safely reach the finish line. However, if the runner is required to carry 10 gallons of water and 10 extra pairs of shoes and an expansive medical kit, he will collapse after the first mile. In other words, at some point, the combined weight of well-meaning regulations begin to hurt more than they help. This is called the “law of diminishing returns,” where the benefit of each additional regulation begins to decrease as the number increases.
Like Tax Accountants (Follow the Money)
As the tax code becomes more complex, the demand for tax accountants increases – because it becomes too difficult for “normal folks” to do their own taxes, and we have to pay someone else. As the regulatory burden increases beyond what is helpful, who benefits? Well, follow the money. Who do we have to hire to help navigate an increasingly complex regulatory burden? Attorneys. Compliance professionals. Consultants, etc.
Meanwhile, the government agencies need more employees to enforce that growing body of regulations, the costs of which are then passed along to credit unions.
Just Regulate, Don’t Nanny-State
Good managers (CEOs or board members) will naturally pursue proper goals with integrity, without being forced. In the worthy pursuit of helping credit unions thrive, sometimes regulators drift into the “nanny-state” realm, legislating behaviors that might be beneficial. You’re probably familiar with the term “helicopter parent?” We all want more small credit unions to survive and thrive, especially at a time when they are rapidly disappearing. But are “more rules” the answer? It’s kind of like testing kids in school: They shouldn’t be spending more time being tested than working and learning.
How Can I Judge?
Many pointless regulations just arrived in the past 20 years, and provide no safety or soundness value at small institutions at all, let alone benefits to members or the public, despite the significant time and cost burden they require. They were instituted for giant credit unions, and we automatically got saddled with them, as well: CECL, NMLS/SAFE Act, HMDA, ALM/NEV, QM Price Controls, and the list goes on. Virtually all of those could be modified to completely exempt our small CUs – with zero impact to our safety or soundness, while freeing up our resources to better “give back” to our members and focus on survival.
Unfortunately, it sometimes takes an Act of Congress to exempt us completely. How did these ever get passed to begin with? Our small CU voices weren’t loud enough, apparently (let’s change that).
The Pendulum Swings Back?
Our Small CU surveys indicate that the second greatest obstacle to our survival as judged by these CEOs, is the regulatory burden, which ranked almost as high as competitive pressure! This seems to indicate the body of regulations has passed the tipping point, and many regulations are now doing more harm than good. But which ones are good and which ones should we keep?
The NCUA, under the leadership of Chairman Kyle Hauptman, is trying to reduce duplicative, redundant or overly costly regulations, where the “juice just isn’t worth the squeeze.” When you consider the nature of bureaucracy, this is a rare and admirable undertaking, it almost never happens. Endangered Small Credit Union Defense (ESCUD) doesn’t agree with all of the proposals (some of those regulations seem integral to our movement and we want to protect the smallest CUs) but many of the deregulatory proposals will certainly probably help. We want to keep that deregulation momentum going, and we are hopeful future proposals will do more to specifically ease the burden on our small CUs.
Gray Areas (Good for Guidance)
What about the gray area, those good ideas that might actually help credit unions be healthier? Well, the number of “good management ideas” that could help credit unions approaches infinity. So, we have to draw the line somewhere. If we don’t, that burden will just grow. Plus, these burdens drive away the good managers who won’t tolerate their hands being tied with nonsensical nanny-state regulations as they try to make a positive difference for people. After they leave, small CUs are left with bad managers who don’t care and who can “check the boxes” but fail the credit union and members in the long run.
Where do we draw the line? How do we help small CUs survive? If you look at strong, healthy credit unions:
- Good managers often hold quarterly employee reviews with their employees. Should we mandate that, and punish the ones that don’t?
- Good managers often spend several minutes discussing interest rate risk during each board meeting. Should we mandate that and punish those who don’t?
- Good managers are constantly analyzing the local housing market. Should we mandate that on a quarterly basis, and punish them when they don’t?
- Good directors pursue a basic understanding of financials. Should we mandate training, and punish them if they don’t?
- Sometimes directors should be involved in bond insurance renewals. Should we mandate that, and punish them if they don’t? Good managers wash their hands with hot water and soap for at least 30 seconds, should we mandate that and punish them when they don’t?
Some of those I made up, some are actual regulations. Many of those are great ideas that good managers do, and it helps their small CUs thrive. The problem is, the good managers will do them when appropriate, even if they aren’t required! When forced, it becomes an ongoing burden even when unnecessary, punishing everyone. Either way, a bad manager can go through the motions and “check the box,” but ultimately fail the credit union.
You can’t regulate bad managers into good ones, and if we try, we risk just increasing an already suffocating regulatory burden.
Merger Mania
Why are small CU merging out of existence so rapidly? Some of the most frequently cited reasons include (as my ESCUD survey results illustrated): The growing regulatory burden, growing competitive pressure, an inability to keep up with technological demands, staffing challenges and just general cost pressure (lacking economies of scale).
Those last three (technological demands, staffing and general cost pressure), are real challenges, but I would argue the root cause is often poor management or apathy (CEO or board), which can only be solved at the individual CU level. How many directors are brave enough to fire their CEO? That’s a tall order, but there are plenty of promising young individuals that would love a shot in the CEO chair, before giving up in a merger.
I had a great conversation with Judy Delucca (Small CU CEO of New Orleans Firemen’s Federal Credit Union) about her amazing work stepping in to help several struggling small CUs in her area. If you aren’t lucky enough to have someone like her step in and help with advice, counsel, bookkeeping, strategic improvement, then hire a good consultant, they are worth their weight in gold!
However, the TOP TWO seem to be related to competitive pressure and the regulatory burden, how do we solve those?
Competitive Pressure: Special Sauce & Give Back
How can you compete with big institutions that have an annual advertising budget greater than your asset size? There are many smarter than I who can advise you on this, but in short: As a small CU, you need to lean into being special and different, which should come naturally due to your small size and limited membership niche (especially if you have a SEG).
Design niche products to meet those needs, with a CU culture that makes you part of their family. As you are healthy and profitable (and not spending all your profits to build branches in distant cities or states), you should have that much more to give back, making you even more unique and valuable while fulfilling your core mission as a tax-exempt cooperative. Small CUs should usually be able to blow the “big bank” competition out of the water, if we do it right.
You Can’t Force Someone to Care
There will always be a certain percentage of CUs that fail because of poor managers or apathy, and that’s been constant since the first credit union was chartered. Yes, there are tons of other factors that contribute to failing small CUs, and tons of different helpful solutions. Our new Endangered Small CU Defense (ESCUD) is not even a year old, but we are asking some verifiable progress achieving regulatory relief. Did you see our appeal to the NCUA and CFPB to exempt small CUs from NMLS/Safe Act compliance Burdens? We don’t want relief from vital regulations that contribute meaningfully to our safety or soundness, obviously
ESCUD advocates to protect small credit unions from extinction by:
- Pushing for Regulatory Relief: We advocate for exemption from overly burdensome, costly and pointless regulations so long this doesn’t negatively impact our safety or soundness, and so long as clarity, transparency and meaningful member participation is maintained.
- Promoting Member-Centric Giving: We encourage small credit unions to radically embrace their not-for-profit cooperative roots and prioritize giving profits back to members. This reinforces our core purpose, justifies our tax-exempt status, and better differentiates us from big banks.
Doug Wadsworth is CEO of Tri-Cities Community Credit Union in Kennewick, Wash., as well as president of a new non-profit advocacy group exclusively for small credit unions, the Endangered Small Credit Union Defense. He can be reached at [email protected] or on LinkedIn here.
